The company both builds and leases data center space around the world, it said, but wouldn't disclose which it would do in India.

Indian-born Nadella made the announcement while visiting India. He also traveled to a Microsoft development center in Hyderabad. .

India has in the past expressed concern about surveillance abroad by the U.S. National Security Agency, after disclosures last year by former NSA contractor Edward Snowden.

Microsoft said its cloud services revenue in India has grown over 100 percent in the past year, and offering locally hosted Azure and Office 365 will further step this up. The locally available cloud services will open opportunities for banking, financial services and insurance companies, state-owned enterprises and government departments to adopt the public cloud, it added.

The public cloud services market in India is expected to grow by over 32 percent in 2014 to about US$557 million, research firm Gartner said in April. Spending on software-as-a-service is expected to go up to $220 million in 2014 after growing by about 33 percent from last year.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com